Saks Q3 2007 Earnings Call Transcript

Nov.20.07 | About: Saks Incorporated (SKS)

Saks Incorporated (NYSE:SKS)

Q32007 Earnings Call

November 20, 2007 10:00 am ET

Executives

StephenI. Sadove – Chairman and Chief Executive Officer

RonaldL. Frasch – President and Chief Marketing Officer

KevinWills – Executive Vice President and Chief Financial Officer

JuliaBentley – Senior Vice President of Investor Relations

Analysts

Dana Cohen – Bank of America Securities

Shelley– Bear Stearns

DeborahWeinswig – Citigroup

ToddSlater – Lazard Freres

HillaryMorrison – Lehman Brothers

MichelleClark – Morgan Stanley

MichelleTan – UBS

EnyaWatts – Sykes

CarlaCasella – JPMorgan

JohnLowman – KDP Investments

Operator

Good morning.My name is Deness (sic) and I will be your conference operator today. At thistime I would like to welcome everyone to the Saks Incorporated third quarterearnings conference call. All lines have been placed on mute to prevent anybackground noise. After the speakers’ remarks there will be a question andanswer session. (Operator Instructions) I will now turn the call over to Mr.Steve Sadove, Chairman and CEO of Saks Incorporated. Please go ahead, Sir.

Stephen I. Sadove

Thank youvery much. This is Steve Sadove, Chairman and CEO of Saks. I’m joined today byRon Frasch, President and Chief Merchandising Officer, Kevin Wills, CFO, andJulia Bentley, Senior Vice-President of Investor Relations. I would like tothank each of you for taking the time to join us today.

Today we’re goingto discuss the financial results for the third quarter and nine-month endedNovember 3rd, 2007, and update you on several other businessmatters. At the end of the call we’ll be glad to respond to any questions youmight have.

Let me notethat some of the comments on the call today, as well as some of the informationpresented in our earnings release related to future results or expectations areconsidered forward-looking information within the definition of the federalsecurities laws. The forward-looking information is premised on many factorsand actual consolidated results might differ materially from projectedinformation if there are any material changes in our assumptions. For adescription of the meaningful risks and assumptions related to theseprojections please refer to the release in our most recent filings with theSEC, including our most recent Form 10K.

I’ll askKevin to briefly comment on the third quarter performance and the balancesheet.

Kevin Wills

Thanks,Steve, and good morning, everyone. For the third quarter we realizedsubstantial improvement in operating performance primarily driven by our 11.4%comparable store sales increase and expense leverage.

Our thirdquarter net income totalled $21.6 million or $0.14 per share, which includedapproximately $4.3 million or $0.03 per share of net after-tax chargesprimarily related to severance, retention, and transition costs, assetimpairment and dispositions, a tax reserve adjustment, and investigation andrelated legal expenses.

Thisperformance compares to the prior year third quarter when the company postedincome from continuing operations of $12.5 million or $0.09 per share, whichincluded after-tax charges netting $4.2 million or $0.03 per share related toseverance, retention, and transition costs, asset impairment and disposition,investigation and related legal expenses, and a one-time pension gain.

Excluding thecertain items just mentioned, our third quarter operating income totalled $51.3million, a 53% increase over $33.5 million last year.

Let me now makea few comments on the balance sheet. Quarterly and comparable store inventoriesincreased approximately 17% over lastyear, attributable to a planned increase at SFA. As a reminder, currentinventory levels reflect our ongoing initiative of a targeted inventoryre-investment strategy begun in the fourth quarter of 2006. These investmentshave been based upon a detailed planning process for our entire store base anda review of benchmark and competitive data, and are contributing to ourincreased sales productivity.

Theincremental inventory relates to replenishment or continuance of product whichwe believe has minimal markdown risk and also to strategic investments in keyitems and vendor intensifications in such high potential areas as shoes,handbags, men’s, and in certain core designer ready-to-wear brands. We believethese investments carry low to moderate risk and we continue to experienceabove average growth in all of these areas. We also continue to expect that ourinventory levels will be more in line with sales growth at fiscal year end.

We ended thequarter with approximately $63 million of cash on hand and $25 million ofdirect outstanding borrowings on our $500 million revolving credit facility.The revolving credit facility borrowings were used to fund third quarterworking capital needs and have subsequently been repaid. Funded debts,including capitalized leases, at quarter end totalled approximately $599million and our debt to capitalization ratio was 34.7%, and this is withoutgiving effect to the cash on hand.

Werepurchased approximately 1.7 million shares of common stock and our averageprice was $15.95 during the quarter. We have remaining availability ofapproximately 35.7 million under existing share repurchase authorization programs.

I will nowturn you back to Steve.

Stephen I. Sadove

Thanks,Kevin. We’re pleased with the year-over-year improvement of our third quarteroperating results. This improvement primarily was driven by strong comp storesales growth and expense leverage. Our third quarter comp store sales increaseof 11.4% indicates that our customers are continuing to respond to ourstrengthened merchandise selections, service initiatives, and innovativemarketing. Both the number of transactions and the average dollars pertransaction rose during the quarter.

Many of ourmerchandise categories performed very well in the quarter. We experiencedoutsized growth in our accessories area with footwear, hand bags, and fine jewelleryall growing in excess of 25%. Worth noting is that our jewellery increase wasmeaningfully driven by a significant increase in large transactions. We alsocontinue to see substantial growth in our men’s business, which generateddouble-digit growth in all categories.

We generatedsolid performance across all geographies and store sizes. Our New York Cityflagship location once again outperformed the company average and was abeneficiary of increase store traffic driven in part by the August opening of10022-SHOE and robust tourism, even though the eighth floor was closed forrenovations at the beginning of the quarter. Ron will tell you more about ourNew York City footwear initiative shortly.

Our strongthird quarter sales performance was achieved despite the disruption associatedwith several recently completed major remodelling projects in addition the NewYork flagship shoe floor, which included South Coast Plaza in Los Angeles,Boston, Phoenix, and Palm Beach Gardens, Florida, s well as some smallerrenovations projects in San Francisco and Chicago.

Therenovation and expansion of Naples has begun and it’s scheduled for completionin the fallout next year. We plan on more similar renovations in 2008.

In each ofthe projects I just mentioned we are focused on making targeted investments,particularly in high-impact vendor shops and first floor selling space, with aheightened focus on return on investment. A great example of the success ofthis focused main-floor capital strategy is the renovation of our Beverly Hillsflagship, which was completed last December. As you’ll recall, we remodelledand expanded hand bag shops for several existing vendors like Gucci, Prada,Chanel, and Louis Vuitton, added a Bendy Shop, and undertook a completerenovation of our shoe and jewellery department. This renovation and theenhanced inventory assortments drove a nearly 40% sales increase in thesebusinesses for the third quarter.

Our capitalspending should total between $135 million and $150 million for the full fiscalyear.

We havemeaningfully improved the customer experience this year through both theimplementation of our new point-of-sales clientelling system and the continuedrollout of our commission program. Our one-of-a-kind clientelling system isfully operational in 23 stores and provides very detailed customer data at thepoint of sale and allows our associates to communicate with and service theirclients with much more frequently and effectively. The system will beimplemented in the balance of the store base in 2008.

Ourperformance-based commission programs have been expanded to nearly 90% of oursales force. These changes are contributing to our comp store sales growth.

Let me talkfor a minute about gross margin. Our 11.4% comp store sales increase in thequarter exceeded our expectations of a high single-digit increase and was evenmore noteworthy given our 8.8% comp growth in last year third quarter. However,during the quarter we began to experience a more promotional and challengingmacro-economic environment and this environment resulted in some modestdownward pressure on our merchandise margins, particularly in the women’sbridge apparel area.

In addition,while our key promotional events, such as Friends and Family and electronicgift card events, were essentially the same year over year, our customersshifted more of their spending to these events causing some additional pressureon merchandise margins. This modest decline was offset by the impact ofunredeemed gift cards that were able to generate a flat year-over-year grossmargin rate for the quarter. Remember, we were able to expand our gross marginrate by 100 basis points in the third quarter last year.

Longer term,we continue to believe we have an opportunity to drive significant gross marginrate improvement as our strategic initiatives to redefine processes, roles, andresponsibilities in system changes are implemented. Ron will talk more aboutthese shortly.

Excluding thecertain items, such as retention, severance, and transition expenses,investigation related expenses, and the prior year pension gain, third quarteryear-over-year SG&A expenses increased by approximately $23 million,principally related to the higher variable expenses associated with our nearly$100 million sales increase. In order to drive comp store sales growth wecontinue to make targeted investments in such areas as selling, payroll, andmarketing. Excluding the certain items, we achieved approximately 30 basispoints of leverage in the third quarter SG&A expense.

As we havepreviously discussed, our SG&A leverage has moderated over the last twoquarters as the significant cost reductions and leverages achieved in priorquarters have been anniversary. Specifically, our third quarter 2006 SG&Aleverage was approximately 300 basis points, excluding certain items.

We remainvery focused on our expense structure and will continue to seek operatingefficiencies while also investing for the long term. Additionally, we were ableto reduce other operating expenses – rents, depreciation, and taxes other thanincome taxes – by 140 basis points in the quarter.

On themarketing front we successfully executed our Fall Wanted program in thisquarter featuring key items such as capes, textured cardigans, and high heelsfor women, and tuxedo dressing and novel ties for men. This bi-annual campaigngrows in importance each season and is supported by marketing, in-store events,visual displays, and heightened clientelling.

We also havemany exciting marketing and events planned for the holiday season. And wecontinue to focus on increased customer acquisition and retention, andrebalancing our marketing spent through more targeted and localized efforts.

The growth ofSaks Direct continues to substantially outpace the company average postinganother approximate 40% increase during the third quarter. We recentlycompleted our total redesign and upgrade of the site, adding more features andmaking it more interactive and easy to use. We continue to add new vendors andmerchandise to upgrade our service and our customers are responding by buyingmore products and more frequently on line. We expect to have a record breakingfourth quarter in the Direct business and to continue to drive outsized growth in 2008 and beyond.

Off 5this continuing to show improvement as we further refine the merchandiseassortment with more direct purchases from core vendors and as we introduceadditional private brand product to the stores. Let me ask Ron to make somecomments about merchandising and systems initiatives.

Ronald L. Frasch

Thank you,Steve. Before I brief you on some of our core merchandising initiatives I’dlike to take an opportunity to speak to you about our 10022-SHOE concept in ourNew York City flagship.

A few yearsago we began to think about ways to distort our footwear business by doingsomething very special. This was served not only as a volume driver, but as adraw to bring the local New York customer into our store. By the time we weredone we had almost the entire eighth floor filled with 100,000 pairs of shoeshousing 50 brands with nearly 100 selling associates with, as you know, it’sown zip code.

What’s beentruly remarkable about the success of this initiative is the cross functionallycollaboration that went into executing the concept. Our merchants, constructionteam, store management, sales store associates, human resource group, andmarketing and special events team worked together as never before to execute10022-SHOE.

We alsolearned a few things about what we can do and how high is high. We changed ourbuying approach. We injected more fashion into the assortments. We changed ourhiring profile, focusing the criteria more on service and fashion than on aspecific category or even retail experience. And we enhanced our floor layout,making it a more social selling environment. All of this seems to be paying offas we are projecting to double our volume for this important category in theNew York store in the first 12 months of operation.

As youprobably recall, early last year we embarked on several important merchandisingprojects that I believe will be key drivers for sales and gross marginimprovement in ’08 and beyond. Our parallel planning process, which began as aphased approach in spring ’06 and has now been completed for our entire storebase. As a reminder, this is a collaborative process between buyers, planners,marketing and store managers to ensure understanding of the core customer ineach of our stores. And we are successfully using the nine-box grid approach tomake more targeted inventory investments in each of our stores.

We completedthe implementation of our I2 merchandise planning system in spring ’07 toaffect the fall ’07 merchandise plan. This financial planning process isenabling our planners and buyers to better maximize the social opportunities ofour stores by focusing the plans of fashion delivery, by allocation, andfull-price sales. We are currently making some modifications to the initialversion of the I2 system and would anticipate realizing the full benefit of thesystem in the second half of ’08.

Most of thisyear we’ve been working closely with Kurt and Salomon Associates, KSA, tofurther enhance our assortment and allocation effectiveness. The major thrustof this work relates to better buy and pre-market processes supported by improvedclarity around roles and responsibilities. We’re investing incrementally inboth systems and people to go to merchandising organization that will enable usto deliver these improvements. We haveworked with KSA to make modifications to our new assortment planning andallocations systems and continue to make further refinements.

Related tothis organizational structure, our longer term plans are to operate with nearlyone-to-one buyer-to-planner ratio versus our previous ratio of only one plannerfor every three buyers. By increasing this ratio believe that our buyers willbe able to spend more time in the market developing assortments that fit thespecific needs of our varying store base and customers while providing muchneeded increase and liveable support.

We haverolled out the KSA buying and pre-market process changes in our men’s division,which represents about 15% of our business. The men’s area made their firstbuys under the new systems and processes for spring ’08 and we believe thatwe’ll begin to see gross margin expansion in this area beginning with the firstend of ’08.

We arecurrently rolling out the new KSA processes in our accessories division, whichrepresents about 25% of our volume, and plan to complete the roll out inwomen’s ready to wear, another 40% of our volume, in the first half of ’08,with gross margin expansion being realized in fall ’08 and ’09 respectively,respectfully in these areas.

Our approachto change has been phased, intentional, and to plan. We’re trying to minimizedisruption and are closely monitoring our results and making adjustments asnecessary. I’m pleased with the progress we have made to date.

Now that wefeel confident in the changes and enhancements of our buying process, which Icall, we have initiated the second phase of our strategy. Working with KSA todrive our selling focus throughout the company. Having the right product in theright stores is only half of the challenge. We have to focus our selling forceon driving the product out the door at full price. Similar to the changes we’remaking in the merchandising organization and processes, this serves as a majorchange for the organization.

I view thesetwo initiatives as interlinked. We are looking at everything from how we getour goods onto the floor to the roles and responsibilities of our sellingmanagers. We’re reviewing and enhancing our in-store training, strengtheningour own boarding, and streamlining our back-of-house processes in order to freeup our selling management. We’re updating our hiring profile, placing much moreweight on service and fashion and less on retail or category experience.

I feel thatwith a combination of focusing on product and selling we will positionourselves well for the future. Steve?

Stephen I. Sadove

Thanks, Ron.I think we’re well positioned for the fourth quarter. Our merchandiseselections have been carefully tailored by market, our holiday marketing andevents are under way. Our service and clientelling efforts are in full swing,and our stores look great.

I continue tobelieve that we are poised to achieve an operating margin of approximately 4%this year. Our expectation is that we can generate high single-digit comp storesales growth in the fourth quarter on top of last year’s fourth quarter comp increaseof 9.9%, but that we may experience modest decline in gross margin rate for theperiod.

We believeour inventories are appropriately positioned as we enter the holiday season.However, it’s clear that we’re now operating in a more challenging, economic,and competitive environment. As we have previously noted, during the prior yearfourth quarter we generated a year-over-year gross margin rate improvement of430 basis points, which included an approximate 50 basis-point benefit due tothe inclusion of the 53rd week. We still expect modest SG&Aexpense leverage for the fourth quarter.

I’m verypleased with substantial progress we’ve made since early last year positioningthe business for the future. In summary, some key takeaways are that, one, we completedthe consolidation and integration of all the corporate functions so that ourorganizational structure has been streamlined and appropriately sized. We arestill looking for efficiencies in ways to reduce our cost structure.

Our by-storemerchandise assortments have been substantially improved resulting in outsizedcomparable store sales gains and expanded gross margin. We’ve continued toimprove the customer experience and increase comp store sales through theimplementation of our new point-of-sales clinetelling system and the expansionof our performance-based commission programs.

We’vedeveloped a comprehensive plan to implement additional refinements to themerchandise, planning, and allocation organization, processes, and systems, andhave recently initiated a comprehensive review of our store organization andprocesses. Both of which should further improve our growth margin and operatingperformance over time.

We’vecontinued to make targeted capital investments, particularly in high impact vendorshops and first floor selling space. And during the quarter we reached asettlement with the SEC and resolved two actions involving vendors, puttingthese matters behind us.

I remainoptimistic about the long-term potential of the luxury sector and the SaksFifth Avenue business in particular. We have a focused, talented, and committedteam and we have meaningfully improved the merchandising, marketing, andservice levels of the business.

We’re in theearly stages of implementing the systematic and operational changes that arerequired to generate significantly improved operating performance and to closethe gap in operating margins with our peer group. I continue to be optimisticregarding our long term strategic plan and believe we can deliver additionaloperating expansions in 2008 and beyond as we benefit from these current andongoing strategic initiatives.

Theimprovement in operating margin is predicated on substantially improving theproductivity of our store base, enhancing our gross margin performance, andleveraging our expense structure over time. I remain confident that we canexpand the operating margin to approximately 8% over the next three years orso.

At this timewe’d be pleased to entertain your questions. Operator?

Question-and-Answer Session

Operator

(OperatorInstructions) We’ll pause for just a moment to compile the Q&A roster.

And our firstquestion will come from the line of Michelle Clark with Morgan Stanley.

Michelle Clark – Morgan Stanley

Yes. Goodmorning. Thank you. First question, you commented on a more challengingmacro-environment. Can you just give us some more specifics on what you’reseeing here? Any regional variation to make note of?

And then thesecond question is, on the gross margin the basis point impact coming from theunredeemed gift cards and is that something that we should expect to continuein the fourth quarter? Thank you.

Stephen I. Sadove

Okay. I’lltalk to the competitive environment and the macro-environment. I’ll ask Kevinto talk on the gift cards.

I think thatthe environment is getting tougher out there. I still think that the luxurysector is very healthy. I think that the consumer is, you know, I think thatthe consumer is clearly seeing some impact, especially at what we would callour good zone. Remember, we’re always thinking in luxury terms, but we’velooked at it from a good-better-best luxury price points and I think thatyou’re seeing more pressure on that aspirational luxury consumer that would beour bridge price points, our entry price points as where you’re seeing more ofthe pressures at the higher-end luxury price points and not seeing a slow down.We feel quite good about that consumer’s buying power at this point.

I think thatyou still have a very healthy DOW at the 13,000 level and I think that overallwe feel quite good about where the fourth quarter is. But clearly you’ve seensome more price competition at the lower end of that spectrum.

Let me haveKevin talk to the gross margin.

Kevin Wills

Sure. Michelle,there were a number of components that go into the gross margin and we do notbreak out the specifics of each of those components. But as we noted in thepress release this morning, we did experience a modest erosion in our coregross merchandising margins and the favourable experience in the quarter inunredeemed gift cards offset this such that we were able to get back to flat.

Michelle Clark – Morgan Stanley

And should weexpect that to continue, the benefit from the unredeemed gift cards in thefourth quarter or is that just the one-time event in the third quarter?

Kevin Wills

I do notanticipate any meaningful benefit for fourth quarter and beyond. The unredeemedgift cards fluctuate by quarter, but I would not anticipate there being anymeaningful benefit for the fourth quarter and I think that is reflected in ouroutlook for the fourth quarter of a modest decline.

Michelle Clark – Morgan Stanley

Right. Thankyou.

Operator

Our nextquestion will come from the line of Deborah Weinswig with Citi.

Deborah Weinswig – Citigroup

Good morningand congratulations on a great quarter.

Stephen I. Sadove

Good morning,Deb.

Deborah Weinswig – Citigroup

Steve, youtalked about kind of, you know, as previously discussed, this kind of morecompetitive macro-environment. Can you talk about any, you know, changes ortweaks in your marketing plan? And it also sounds like you guys have been alittle bit more localized.

Stephen I. Sadove

Well, clearlywe’re being more localized, both from an assortment and from some of themarketing outreach ident programming that we’ve been doing. I think that thepromotions that we’re running are essentially the same, if you were looking ona calendar-to-calendar basis. What we’re seeing is and we’re responding in someways to competitive environment, especially where we talked about in the bridgeprice points in terms of some accelerated clearance cadence so that where someof our competitors have been marking down more aggressively at some of thebridge price points we’re going to be competitive and meet some of those markdowns.

But I thinkagain this is more what I would have called that good price point, bridge pricepoints that we’re dealing with overall. But I think that clearly we’re beinglocalized. Things like on a local basis where we’ve been doing some luxury jewelleryevents, an example. Direct marketing programs have been benefitting us. You sawI mentioned the outsized growth that we’ve been seeing in fine jewellery,that’s an example of some of the localized programming that we’ve been doing.

Deborah Weinswig – Citigroup

And then,Ron, you talked about the I2 merchandising system and that it did have someimpact on the fall planning. Can you maybe elaborate on that?

Ronald L. Frasch

Yes, Debbie.What it did was it allowed us to plan our business at the individual deliverylevel much more thoroughly and completely, allowing visibility into seasonalityof the deliveries and the planning of the south roads and subsequentdisposition of the product.

Deborah Weinswig – Citigroup

Okay. Andthen last question for Steve, there’s, I mean, you clearly are doing an amazingjob in Direct and I would say seeing a much better growth in a lot of yourcompetitors. Can you talk about what you’re doing specifically there and willyou expect those trends to continue?

Stephen I. Sadove

We feelterrific about the Direct business. If you step back from it, up until twoyears ago we really didn’t have the full capabilities. There was a long periodof time where we were sourcing the product through the stores. We didn’t havethe fulfillment capabilities. We established that in our Aberdeen, Maryland,facility. And that allowed us to really start marketing the business and buildthe vendor matrix.

Over the lastyear and a half or so we’ve really expanded the vendor matrix. We’ve started toaccelerate our marketing activities. We’ve been much more competitive in oursearch dollars that we spend in marketing. And in terms of the consumerresponse, we’ve been able to build the E-mail database, we’ve been able tostart doing the marketing to the customer, we’ve been able to meet thatcustomer’s need both in terms of in the store and online because that dualcustomer is actually a very important one for us. And we’re continuing to seevery outsized growth.

Lookingahead, we’ve also learned, by the way, that it’s a more fashion consciouscustomer. It’s a little bit younger than our full line customer. So we’ve beenable to tailor the assortment for that customer.

Lookingahead, I continue to see outsized growth out of Direct. We’re feeding it. We’realso starting to use it beyond just a selling channel to being a marketingchannel. An example of that is if you went on the website after the last seasonshows you saw our videos where we had a summary of the New York shows. Soyou’re going to see more of that. You’re seeing more of vendor description,videos that describe Denver’s products. And helping us establish ourselves asour edited point of view.

So I’m veryoptimistic that Direct will have outsized growth, but it’s also going to be aneven more integral part of the marketing of the business.

Deborah Weinswig – Citigroup

Great. Thankso much and best of luck this holiday season.

Stephen I. Sadove

Thanks.

Operator

Your nextquestion will come from the line of Dana Cohen with Banc of America.

Dana Cohen – Banc of America Securities

Hey, guys.Couple questions. Just wanted to go back on the gift card breakage. I mean,assuming something less than 100 basis points in terms of gross marginpressure, would it be fair to think that the gift card breakage could have beenas much as $0.02 to the quarter.

Kevin Wills

Sorry, Dana,as we indicated earlier, we don’t break out the specific components of theamounts. As we indicated, we had modest deterioration in the core gross marginand due to the breakage in the gift card quarter we’ve had a favourableexperience there that we were able to offset that. But we don’t break out theindividual components.

Dana Cohen – Banc of America Securities

And was thisthe first time you took the gift card breakage?

Kevin Wills

That issomething that we evaluate periodically and we have a favourable adjustment inthe quarter.

Dana Cohen – Banc of America Securities

No, Iunderstand that, but companies have been announcing this and putting these outand, you know, it’s the first time they ever did it. Because that’s theaccumulative effect of all of them. So is this the first time you’ve done this?

Kevin Wills

It is not thefirst time we have done this. We have, again, we evaluate this periodically.

Dana Cohen – Banc of America Securities

Okay. Andthen my other question is, on the guidance for the fourth quarter, given thatyou’re not changing your guidance for the year in terms of operating margin,but you sound more conservative on gross margin, is the offset SG&A? Isthat the way we should think about it? Or is it the fact that sales have beencoming in better?

Kevin Wills

This isKevin. I’ll start and Steve may want to finish. But again, we indicated theiroutlook on the sales is high single digits for the quarter. We would anticipateprobably more SG&A leverage in the fourth quarter than you saw us deliverin the third quarter.

If yourecall, we started getting some SG&A leverage in 2006 and in the thirdquarter of 2006 was our high water mark relative to SG&A leverage in whichwe delivered about 300 basis points of leverage in SG&A ex-items. So from acomparison perspective a third quarter SG&A was a little harder than whatwe anticipate in the fourth quarter.

Dana Cohen – Banc of America Securities

And lastquestion, I just want to go over, you said that the sort of change in theenvironment is primarily at sort of the lower price points. I just want toconfirm that. So it’s really a bridge issue and as you scale up, you know, sortof, that you’ve seen the same trends.

Stephen I. Sadove

I’m sorry,Dana. Yeah, I think that that’s an accurate way of portraying it is that themore pressure is at the bridge price points than we’re seeing at the higherprice points.

Dana Cohen – Banc of America Securities

So when youcommented that you’ve seen the customer shift their buying patterns and I guessthere was a mixed shift to more of the friends and family or the event. Is thatbroad-based or is that primarily concentrated at the lower price points?

Stephen I. Sadove

No, I thinkyou’re seeing some of that shift broad base. I think that even at the higherprice points you’re seeing the consumer responding very well to the triplepoint or double point events or the points events or to the EGCs. So you’reseeing that impact cutting across the board. Where you’re seeing the morepromote, the far more pressure in terms of mark downs or competitive environmentis at the bridge price point.

Dana Cohen – Banc of America Securities

Thanks somuch.

Operator

Your nextquestion will come from the line of Christine Augustine with Bear Stearns.

Shelley – Bear Stearns

Hi, this isShelly on Christine’s behalf. Third quarter results in the fourth quarterguidance seems to imply that you need about a high single-digit comp toleverage your buying and occupancy expenses and I’m just wondering if you’rebeing proactive in identifying any areas for possible cost cutting as businesstrends become even more difficult and where you think there’s still room to cutcosts. And would that possibly include a consolidation of your stores anddirect buying groups?

Stephen I. Sadove

I’ll make anoverall comment and then return it to Kevin. I think we’ve done a very good jobof managing the, right-sizing the cost base of this company. Remember, you stepback a year ago, this was a holding company that had, that was Birminghambased, that had the department stores as well as Saks Fifth Avenue. If you lookat the corporate overhead, the infrastructure, we’ve downsized the centerdramatically. If you were to look at our IT support or any of the centralfunctions they’ve been reduced by roughly half. And I think that we’ve done a,you know, moved the corporate headquarters to New York, recreated a number ofthe functions and done it without a hiccup relative to the management of the business.

As we look atthe corporate cost structure we think that there are some opportunities.They’re more modest than the dramatic cuts that we’ve made and we’re continuingto look at it. Part of the, you know, we wanted to be very cautious as we wentforward on managing some of the costs down because we had to deliver againstthe running of the business. But there continue to be operational improvementopportunities.

As it relatesto the store base, we’ve said along the way that as we enter into the parallelplanning process and the nine-box grid that we were going to have a game planor growth plan by store that would lead it to an acceptable level ofprofitability. We’re into that over the course of this year and feeling goodacross the board of the improvement on a store-by-store basis. If and when thetime were to come that we weren’t to feel good about the progress that somestores, individual stores were making and feel that we couldn’t get to where wewanted to then obviously we would relook at some of the stores. But I feelquite good about it.

As it relatesto consolidation of the organization, you know, right now we don’t believethat, we feel very good about the Direct growth and the operation and theorganization and that it is a different business. What the buyers are doing inthe Direct business is different in many ways than what the buyers are doing inthe full line basis. There is a lot of opportunity for synergy between thegroups, communication, working very closely together in terms of how we planand how we promote the brands. I’m not so sure, and the buying organization inDirect is very, very small. It’s not a large number of people. So I’m not surethat the major opportunity would be consolidation of those buying organizationstoday. Obviously it’s the kind of thing that we would over time continue tolook at, but I would not see that as being a near term opportunity.

I’m going toturn to Kevin to make any other comments on it.

Kevin Wills

I think Stevedid a good job of summarizing, but specifically to your question on leverage inthe buying group. As you heard us speak previously, we are making investmentsin our buying and planning organization in part based on the work we do withKSA. So as we’re looking at 2007 we are not seeing any appreciable leverage inthose calls because again we’ve made a decision to invest in that business andtry to get our planning ratio back up to what we believe to be an acceptablelevel.

Shelley – Bear Stearns

Okay. I justhave one other question. Given the legal issues that you’ve had in the pastwith regard to vendor allowances, do you think that might hinder your abilityto take future allowances if sales trends were to swell?

Stephen I. Sadove

No, we don’tsee that having an impact at all. We have a very, very good relationship withthe vendor community. We feel that we have no issue relative to collecting theappropriate level of vendor allowances on a go-forward basis.

Shelley – Bear Stearns

Okay. Great.Thank you.

Operator

Your nextquestion will come from the line of Enya Watts with Sykes (sic).

Enya Watts – Sykes

Hello. Sorry,I joined the call late. You might have said this already. Can you estimate howmuch of your sales is driven by international buying?

Stephen I. Sadove

How much ofour what?

Enya Watts – Sykes

How much ofyour sales is international buyers?

Stephen I. Sadove

The question,I think, if I understand, is the impact that international tourism has beenhaving on our business. Is that correct?

Enya Watts – Sykes

That’s right.

Stephen I. Sadove

I think thatclearly the weak dollar has had some tourism impact, especially in our gatewaycities. New York especially. Perhaps some in Beverly Hills. I don’t think thatit’s a huge number relative to moving the comp performance. We had very strongcomp performance in the quarter. We saw outsized growth. In the New York marketI think it probably, we don’t have specific numbers, it probably helped acouple points in our New York business. We feel very good about the impact thatthat’s having on the holiday season. So it’s a positive, clearly.

Enya Watts – Sykes

Great. Andthen, this actually may be a tough question as well in terms of theaspirational buyer. Do you know how much of your sales is to that population?

Stephen I. Sadove

It’s a hard questionto answer. The specific numbers, I think, that if I were to look at one, youknow, it’s sort of if I were to look just at bridge closing you would look atit and say, gee, that in and of itself might be 10% of your, in that range ofyour business, but you’ve got an aspirational customer, a customer who’s buyinggood, the bridge price points across other categories as well. I don’t have aspecific number. It is not the majority of our business. Our majority, muchbigger piece of our business is at the higher price points. But it’s, obviouslythere is that aspirational customer.

Enya Watts – Sykes

Great. Thankyou.

Operator

Your nextquestion will come from the line of Todd Slater with Lazard Capital Markets.

Todd Slater – Lazard Freres

Thanks andlet me add my congratulations on your continued recovery here.

Stephen I. Sadove

Thanks, Todd.

Todd Slater – Lazard Freres

Just a quickquestion for Ron, a follow up on the bridge category. If it’s about 10% of yourtotal is there a way to reduce that order a little bit given the weakness thereand increase exposure to and invest some of the inventory in some of thesehigher margin or better trending categories like hand bags and jewellery andstuff like that?

Ronald L. Frasch

Todd, thankyou. Clearly we have made what we think is the appropriate downsizing of thosebusinesses to better balance our inventories. And quite frankly, we’ve foundgreat support from the vendor community in support of our initiative.

Todd Slater – Lazard Freres

Okay. Andthen obviously the results in footwear and that floor conversion have beenphenomenal. I’m wondering if you could just talk about what you can apply fromthat experience to, let’s say, other areas of the store? Maybe you can talkabout any initiatives that you may have in ’08 in some of the other key partsof the store.

Ronald L. Frasch

The biggestinitiative we have on the table that we are prepared to discuss right now for’08 is the renovation of the New York third floor, which we will complete,which is our designer apparel floor. That will be over the period of ’08,probably mid to second half of ’08. And ’09 will be completely renovated. Notdissimilar to what we did to the shoe department on eight.

We also havea number of locations that we are going to initiate. Kind of a 10022-SHOEpresence in out-of-town stores.

Stephen I. Sadove

Yeah. Ithink, Todd, that one of the lessons learned that we had from this, and Ronreferred to it in his remarks, which is the power of fully integrated andcross-functional focus against a big idea and putting the resources to make it,whether it’s the product or the marketing or the floor presence, to make it abig idea. So we’re going to be doing that as it relates to the designer floor,but also some of the other ideas in terms of the renovations and the continuedfocussed renovations that we’re going to be doing.

I think thata couple comments are somewhat related. We feel remarkably good about the shoefloor and what has happened there, but whether it’s the Beverly Hills story or whatwe’ve done in Phoenix or Palm Beach Gardens, the renovations in Boston, the SanFrancisco and Chicago designer renovations, I think that they all point to thatfocused investment against ideas are what are going to drive the performance ofthis business. The numbers that we’ve been seeing are despite being underconstruction in a number of these areas. So we ought to start to see thebenefits of some of these renovations that we just completed as we go into ’08as well. And then we’ll start the next phase of them.

Todd Slater – Lazard Freres

And if youare renovating the third floor next year, you said in mid to late ’08, are yougoing to have, try to have that accomplished before obviously the importantholiday season and the risk that you run through holiday in that?

Stephen I. Sadove

It’ll be in aphased basis. So we’ll be able to, you know, clearly there’s going to be somedisruption as we go through the construction, but it’ll, you know, we’ll try todo this into two phases, basically.

Todd Slater – Lazard Freres

Okay. Allright. Great. And then just on the Direct side. I’m wondering if you could justtalk about any thinking you might have on returning to the catalogue businessand whether or not this could be leveragable on obviously your very strongdirect platform?

Stephen I. Sadove

Yeah, I thinkthat, you know, I don’t want to commit to saying one thing or another relative to,you know, clearly catalogues, we were in the catalogue business. We had abusiness that was discontinued about five years ago called Folio. That was arelatively big business. It wasn’t a very profitable business, but it was a bigbusiness. I’m not so sure that getting us back into the catalogue businesstoday is necessarily the right answer. There may be some focused small catalogues.We did some Saks suggests Saks.com catalogues that supported the Directbusiness. I think that may make sense. I’m not so sure that re-entering thecatalogue business in a big way right now is the right answer for us. Wecertainly will look at it.

If you lookat most of our competitors, they’re actually moving away from catalogues as wespeak. So it’s not a black-and-white issue. There may be some rollouts, somefocused catalogues to support Direct that make some sense.

Todd Slater – Lazard Freres

Okay. Andthen just one sort of longer term question that’s back to the operating margin.As they expand from, let’s say, 4% to 8% over time, can you just remind usagain what you think the, how the components of gross margin and SG&A breakout in that expansion. Is it roughly evenly split? Is there larger leverage onexpense or larger gross margin component of that operating margin improvement?

Stephen I. Sadove

You know,we’ve never given detailed breakout of the split between gross margin SG&A.I would tell you that there’s substantial opportunity in both and that you’regoing to see, you know, I don’t want to get into if it’s a 55-45 or a 60-40split. I would tell you that they’re both going to be able to generatemeaningful improvement. To get the kind of improvement that you’re talkingabout they’re both going to be predicated on continued outsized top-line growthin terms of the productivity increases in our stores.

As you’re allfamiliar with our focus is on increasing the productivity of the current storebase, not opening up lots of new stores. It’s more of what we’ve just beentalking about in terms of the renovations and the focused Denver additions andfocused shops and that top-line growth coupled with the planning andassortment, the KSA work that Ron referred to, the improved selling culture,the more full price selling, leveraging that top-line growth by very, verytightly controlling the absolute dollar increases of our cost base recognizingthat a portion of it is variable with sales because of the conditionedenvironment, but that the non-commissioned part of it we’d be very, verydiligent relative to allowing any cost increases. That’s going to drive theincreases that we talk about in margin.

Todd Slater – Lazard Freres

Perfect.That’s very good colour and all the best in the holiday.

Stephen I. Sadove

Thanks a lot.

Operator

Your nextquestion will come from the line of Carla Casella with JPMorgan.

Carla Casella – JPMorgan

Hi. Youtalked a bit about the inventory ending the quarter a bit higher and I’mwondering how you feel that stands as of the mid-November? Is that in line? Areyou seeing that come down as you would expect?

Stephen I. Sadove

Yeah, I’m notgoing to come in in terms of mid-quarter, mid-month or mid-quarter performance.As of the end of October, which is what we just reported, you know, I felt verygood about where we ended up on the comp inventory. It was right in line withwhere we expected and hoped it to be.

Remember, ifyou go back in terms of a year ago, last year’s comp inventory increase at theend of the third quarter was in the 3% range. It was right when we had startedthe investment and inventory that we believe was required to get the businessgoing again. So that was coming off of that lower number. As you look at thefourth quarter number you’re going to be looking at last year’s fourth quarter,which was at a 21% comp inventory increase because that’s when we startedputting that product in. And that’s why we now are feeling comfortable thatwe’re going to be able to start bringing the inventories back in line with ourgrowth rate and we feel comfortable that we’re on a path that’s going to get usto the right levels and inventory by the end of the quarter.

Carla Casella – JPMorgan

Okay. Great.That’s helpful. And then on the one-time post-tax item, specifically the $2.7million for the investigation. What is that on the pre-tax basis?

Kevin Wills

Kevin. Youcould assume a 40% effective tax rate. So on a pre-tax basis it would be in theneighbourhood of $4.5 million to $5 million.

Carla Casella – JPMorgan

Okay. Great.And then your footwear, hand bags, and fine jewellery are so strong. Do youthink, do you know who you think you’re taking share from?

Stephen I. Sadove

Oh, gosh, youknow, that’s such a hard question because part of it is a market expansion.You’ve got, there’s a growth, you know, you have a luxury customer who isincreasing their purchases. So there’s a market aspect of this. I can’t tellyou whether, I think if I were to look at our vendors, you can look at thereports from a Gucci, Louis Vuitton, Chanel, where there are public, wherethere are filings in terms of the external reports where they’re performingexceptionally well, too. So I think what you’re finding is that there is such ademand for the luxury products I believe that is a long-term secular growthdriven by culture, driven by the economics of the higher end consumer. Thatyou’re seeing market growth that we’re benefitting from.

Are we in amarket-by-market basis, are we potentially taking share from a competitor in agiven market? I’m sure that that may be the case. But I think that you have amuch larger dynamic going on here.

Carla Casella – JPMorgan

Okay. And Ihave two quick housekeeping items. What’s the total square footage of the NewYork Saks store?

Stephen I. Sadove

I think thatthe total gross number, meaning front of house and back of house, is about 650,000 square feet.

Carla Casella – JPMorgan

Okay.

Stephen I. Sadove

That’sincluding non-selling as well.

Carla Casella – JPMorgan

So sellingmight be closer to 600 then?

Stephen I. Sadove

No, no. Itwould be a lot less than that. It might be 400. Somewhere in that range.

Carla Casella – JPMorgan

Okay. Andthen did you buy back any additional bonds in the quarter or should your bondsoutstanding be the same as they were last quarter?

Stephen I. Sadove

We did notbuy any additional bonds this quarter.

Carla Casella – JPMorgan

Okay. Great.Thank you.

Operator

Your nextquestion will come from the line of John Lowman with KDP Investments.

John Lowman – KDP Investments

Hey, goodmorning, gentlemen. Thank you for the call. I wanted to talk about the growthin the Direct business. You believe it’s going to be outsized. Do you thinkthat growth is going to come at some market share to the stores or do you seethat the growth is going to be coming from consumers in areas where Sakscurrently doesn’t have a footprint?

Stephen I. Sadove

Yeah, it’svery interesting. It clearly is not, we don’t believe it’s going to come fromthe stores. And in fact, you know, there’s some component of it that’s going tocome from customers who don’t obviously have a Saks near them. But what we’vefound over time is that multi-channel shopping, the customer who’s buying bothin the store and online, is actually a driver of growth. And that customer whoshops both channels has a much higher propensity to consume than the customerwho’s only shopping one channel. So the two are working synergistically witheach other.

John Lowman – KDP Investments

So basicallywhat you’re saying is the customer who shops at Saks Fifth Avenue may just doadditional impulse shopping, if you will, online as opposed to going to thestore.

Stephen I. Sadove

You have someof that going on, absolutely. They also may go on line and vice-versa. They maygo on line, they find some items, they may find an item that they don’t, thatdoesn’t fit right, they then may bring it back to the store. When they bring itback to the store they may exchange it and buy more items so that there’s a trade-upeffect that goes on. So there’s a lot of interaction between the two channels.

And we’realso finding more and more because with the new point-of-sale system you’reable to directly access our online business so you have associates, if thereisn’t an item available in the store, there are now sourcing the item directlyfrom the Direct channel as well.

John Lowman – KDP Investments

Yeah. That’strue. That’s good colour. On the luxury consumer you’d mentioned in this call,and I think in previous calls, their outlook looks fine and you had balled itup with the stock market performance. Do you still see, for analysts, thatthat’s really a key factor of what we should be monitoring to see any potentialdeterioration or appreciation in the luxury consumers demand for your goods?

Stephen I. Sadove

Yeah, I’vealways used that as a surrogate. I think it’s a good one in terms of that ourcustomer is more, you know, because it’s a confidence issue and it’s how dothey feel about themselves and their personal wealth and the outlook for thefuture that add a, you know, with the DOW at a 13,000 level our customer feelsgood about themselves. You know, if you see within a plus or minus range, amodest range, I don’t see that as affecting their outlook on the future. If youtold me that the DOW was going to be at 10,000 or some number below that Imight get more concerned about how our customer’s going to be feeling. But theyhave not been affected by the $3.50 gas price. They’re not affected directly bythe sub-prime or their mortgages or default or anything like that. But clearlythey are affected, you’ll have a narrow segment that may be affected by a WallStreet bonus being lower, but even at a 10% to 15% drop, which is the projecteddrop on Wall Street bonuses, I don’t believe that that’s going to affect theirattitude towards their personal shopping.

I would tellyou that we track, for example, nobody’s asked this, but tracking our creditcards. We’ve had essentially very, very little, if any, deterioration in ourcredit card base or delinquencies or anything like that.

John Lowman – KDP Investments

You’reanswering my follow up question. One last thing. You’d mentioned your targetfor debt to or funded debt to EBIDTA about 2.5 times. As you measure EBIDTA,where do you see that target at currently?

Stephen I. Sadove

I’m sorry,when you say that –

John Lowman – KDP Investments

The questionis, where would the funded debt to EBIDTA right now?

Stephen I. Sadove

As we’veindicated, our funded debt to EBIDTA target is less than 2.5 times and wecurrently believe on an LTM basis, if we look at our EBIDTA ex certain timesthat we’re under the 2.5 times now.

John Lowman – KDP Investments

Okay. Allright. Thank you, gentlemen. And good success in the upcoming holiday.

Stephen I. Sadove

Thanks.

Operator

Your nextquestion will come from the line of Robert Drbul with Lehman Brothers.

Hillary Morrison – Lehman Brothers

Hi. This isactually Hillary Morrison calling in for Bob. I’m hoping you can talk about thepercentage of your sales that are now private label and off set versus lastyear and what level of penetration you’re working towards?

Also I waswondering, given the more challenging promotional environment, do you have anypromotional events planned incrementally this year?

And also, youmay have covered this, but also could you talk about the comp cadence forNovember versus December?

Thanks.

Stephen I. Sadove

Okay, what’sthe last question?

Hillary Morrison – Lehman Brothers

The compcadence for November versus December given the shift.

Stephen I. Sadove

Comp cadence.Okay. There’s several questions there. Let me just tick them off. On privatebrand, as you start with private brand is a small component of our business.People shop Saks for the brand. It’s a house of brands. Private brand does playa role in some classification businesses where vendors aren’t providing what wethink is a, you know, providing what we think is meeting our customers’ needs.It had been discontinued in the last year. We’ve gotten back into the businesswith, under the Saks Fifth Avenue label with Classic and Sports signature. Ithink we’ve gotten off to a good start with that. I feel very optimistic. Someof it’s done better than others. But I feel good about where we are. I thinkthere’s an opportunity to continue to build that business.

It will neverbe the kind of percentages that you see in some of the traditional departmentstores. This isn’t a 20% of a Saks business. Maybe it’s a mid-single-digit typeof a number, but it’s going to play a role and we had a meaningful businessseveral years ago with real clothes. So we know that there is a business to behad and we’ll continue to evolve and modestly grow that business.

Right now Ronis working very hard in terms of identifying what the right business system isand how we should source it and whether or not we ought to be using the vendorcommunity or direct sourcing the product. But I do see an opportunity there.

The secondquestion on Off Fifth. You know, we don’t break out for reporting purposes OffFifth as a segment, so we don’t give the specific percentage of the business.It is not, you know, first of all, I feel very good about Off Fifth. We’reseeing substantially improved performance. We’re seeing good marginperformance, operating margin performance on the business, and top-line growthduring the quarter. We’ve moved the strategy of that business away from doingjust a sell off business to more of a distribution channel where we aresourcing the business directly, as well as using our vendors to cut productdirectly for Off Fifth. That strategy is appearing to be successful and thatoffers substantial growth opportunities for us both in terms of same store aswell as geographic expansion. So we feel quite good about the opportunity there.

Let me turnto Kevin to speak to cadence for November-December.

Kevin Wills

As we’dindicated, we expect to see outsized growth in November and below average compsales growth in December due to the calendar shift.

I believeyour other question was, was there anticipated to be an increase in fourthquarter promotions? Right now we’d certainly say that our fourth quarterpromotional calendar to be relatively constant with the prior year.

Hillary Morrison – Lehman Brothers

Great. Thanksso much.

Operator

Your nextquestion will come from the line of Michelle Tan with UBS.

Michelle Tan – UBS

Just a coupleof questions. The first one was on the growth margin guidance for a modestdecline in the fourth quarter. Just looking at it it seems like, that the comparesare pretty tough, as you noted, versus third quarter when the merchandisemargin was down. You’ve also got the 50 basis points benefit from the 50 thatyou observed last year. So can you help us think about what some offsets tothose kind of pressures might be to help keep the decline relatively modest inthe fourth quarter?

And thenalso, I know you don’t own it anymore, but do you have any reads from thecredit card data that you see on your private label card? Thanks.

Stephen I. Sadove

Michelle, we’rehearing about every other word, so tell me if we’re not answering what you’relooking for. It was breaking up.

I think thesecond part of your question was on the credit cards, which I think was what wehad talked about a few minutes ago, which was, we have not seen deteriorationon the credit cards in terms of the portfolio, our credit card Saks Firstcustomer, and the penetration of credit cards is holding up very nicely. We’reseeing outsized growth among our Saks First customers, so we feel good abouttheir purchase patterns and behaviours. So we feel actually quite good aboutboth the portfolio and the state of the Saks customer.

In terms ofthe gross margin performance, one of the things that you want to look at, wedid, we’ve stated that last year was benefitted 50 basis points or so by the 53rdweek. We also have always stated that you are always going to have a toughertime in terms of gross margin improvement on a third quarter versus a fourthquarter or first quarter versus a second quarter because if you buyappropriately you’re going to have, you know, as we do a much better job ofbuying and allocating product you’re going to have less markdowns. They givemore of an opportunity for improvement in the fourth and the second quartersthan you would in the first and third quarters. So that would be one of thethings as you look at it as we’re looking at a quarter to quarter basis.

I don’t know,Kevin, if there’s anything you want to add.

Kevin Wills

I thinkthat’s right, Steve. Michelle, did we answer your question?

Michelle Tan – UBS

You did.Thanks a lot. Sorry for the bad connection.

Stephen I. Sadove

Okay. Noproblem.

Operator

Your nextquestion will come from the line of Dana Telsey with Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Hi. Goodmorning.

Stephen I. Sadove

Good morning,Dana.

Dana Telsey – Telsey Advisory Group

Good morning.Could you expand a little bit just on the KSA initiatives and what the benefitscould be next year and how much a part of getting to that 8% operating margintarget in three years do you see it as? And are there any other initiativesthat we should expect that are new or different coming up next year that wouldbe helpful? Thank you.

Stephen I. Sadove

All right.That’s a great question. I view the KSA initiatives as being some of the mostimportant ones in this company. I’ll talk for a moment and then I’m going tolet Ron talk.

They cutacross two areas, both the merchandising side, the planning allocation, how wego to market, how we assort, and then the selling side, which is evolving theselling culture of the company. And getting clarity. Getting our salesassociates to focus on full price selling. Getting our department managers tospend their time on the floor with the associates as opposed to in the backroom trying to do some of the operational work because that wasn’t being donein the most efficient manner.

So these twoinitiatives are, and they are intertwined, as Ron had said, are so fundamentalto becoming a better merchandising and selling organization. And within thosetwo marketing is the third leg of the stool because if you have the rightproduct and you have the right selling having the right local marketingsupporting them becomes a part of that as well. So I can’t think of anythingthat’s more important.

Clearly, aswe think about other initiatives, we’re going to be taking the concept ofcapital investment in focus stores where we think we can get a good return oninvestment with vendor shops and jewellery departments and the designer kind offloors. That’s a major focus. It’s the same strategy as we started this year,but it’s a different set of stores. We’ll announce what those stores are whenwe, you know, at an appropriate time when we talk about the ’08 plan.

But I feelvery good about focused capital, focused merchandising planning and allocation,and excelling culture initiatives that’s driving it. Let me have Ron talk alittle bit about what he sees happening as it relates to what you can see inthe ’08 performance.

Ronald L. Frasch

Well, Dana,maybe just a little bit of background if I might because I know Steve hasspoken before about some of the cultural challenges that have existed here fora long time. A big part of it has been getting people’s roles andresponsibilities aligned with our expectations. Perhaps the most significantcomponent of the KSA project work are getting people aligned with what we wantthem to do. There’s been some tremendous cultural changes. I must say thatthere’s been some road bumps, but as we’ve gotten through it we’ve beenenormously transparent with the organization about what, the road thus far, butwe’ve had terrific success and a great embracing of the projects, particularlythe KSA merchandising projects.

Now, goinginto the stores project, this has begun with a test in a handful of stores inthe southern region and will run for a few months and then we’ll decide, we’llgo through the same learning curve and then roll it out to more stores. But the–

Stephen I. Sadove

That’s right.I think it’s fair to say, as Ron talks about some of the tips, we’re findingsome early on things, findings that are very, really quite interesting andexciting in terms of how we can get product from the back room onto the floorquicker, how we can get the department managers focusing their time workingwith their selling associates. We have some data that was indicating that therewas a substantial amount about the department manager’s time that was, itwasn’t that they weren’t working hard, but they weren’t spending their time onthe floor and the associates, the selling associates weren’t selling on thefloors efficiently. So there’s a lot of quick wins that we think we can gethere.

Ronald L. Frasch

And the KSAmerchandising side, also, getting the learning that we’re finding about gettingthe right product and the right store, providing a much enhanced trainingenvironment for our planners and buyers. The learnings have been terrific. Sowe know we’re going to see impact in the spring season with men and as we goforward for the balance of the company in the second half of ’08 and beginningof ’09.

Dana Telsey – Telsey Advisory Group

Thank youvery much.

Operator

Your nextquestion is a follow up question from the line of Dana Cohen with Banc ofAmerica.

Dana Cohen – Banc of America Securities

Yeah, hi,guys. Two quick follow ups. The category that you talked about, the 10% that’sthe bridge business that is the issue, is that just traditional bridge or doesthat include contemporary?

Stephen I. Sadove

That would betraditional bridge.

Dana Cohen – Banc of America Securities

Okay. Andthat’s really the issue with not, you know, it’s really just the traditionalbridge brands.

Stephen I. Sadove

Yeah.

Dana Cohen – Banc of America Securities

Okay. Andthen when you said that the, you’ve seen the outsized growth in the Saks Firstcustomer, would that mean that the penetration of the card business is actuallyup year over year?

Stephen I. Sadove

We’retalking, you’re not talking difference between the two. It’s relatively flat.

Dana Cohen – Banc of America Securities

Okay.Perfect. Thanks, guys.

Operator

And at thistime there are no further questions.

Stephen I. Sadove

Well, thankyou all very much for joining us on the call. We look forward to talking to youagain. Thanks a lot.

Operator

Ladies andgentlemen, this does conclude the Saks Incorporated third quarter earningsconference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!